The stock market is made up of many exchanges, such as the FTSE 100, where shares in the biggest companies with the highest values are available to trade. Outside of the main markets, there are other specialized stock markets and small investment markets, and these include penny stock markets.
What is Penny Stock?
A penny stock is a low value stock, usually one that is below £3 per share, although different brokers have different rules to define penny stock.
Companies that trade penny stock are usually considered a more volatile or risky investment. This is due to them having fewer assets and a short history. With this risk also comes the chance of rewards; buying a small-value stock means that you have a chance of your small investment multiplying at a higher rate than a more expensive stock buy.
Penny stock is categorized in different ways:
New issues – These are companies new to the stock market. Many companies will begin as penny stock before they are worth big money, and this is part of the attraction of penny stock.
Recovery shares – These are companies that have previously performed well, but have seen a fall. The shares are offered as penny stock, with the potential for the company to turn around its performance again.
Internet Companies – Internet start-ups tend to begin trading on the penny stock market. This is because the majority of their business is conducted online, with little or no assets.
There are other companies that start off in the penny stock sector, mainly due to the volatile nature of the market they are in. Bio-tech companies, for example, may start here, as the majority of the products they develop may not make it to market. This also makes them an attractive proposition for some investors, as one good product can see them boom from a penny stock to a blue chip company in a short time.
Is Penny Stock Right for You?
The penny stock market attracts investors of all types, although many brokers do recommend you have some experience in the markets before going this way. The penny stock is known for its volatile nature, with companies that trade on this market having little or no trading history.
The volatile nature of penny stocks makes them ideal if you are a day trader. You can make a lot of money predicting the ups and downs each day. Penny stock make it possible for day traders to earn a good return without leverage.
The companies you invest in when you buy penny stock will be small, with very few assets, and this does make them more risky. As always, with risk comes reward, as there is potential for your investment in a penny stock to increase vastly. If a company starts out trading at just a few pence a share, and sees success in their industry, they could become worth hundreds of pounds per share.
This is what attracts investors to the penny market. The best way to make sure you are successful is to do your research. Only invest with what you can afford to lose, as the penny stock may go down and become worthless. There are many things to consider when choosing a penny stock to invest in, so make sure you look into all aspects of the stock before investing.